Small business owners are driving a continuing increase in the adoption of cash balance retirement plans, and those plans are leaving growth of new 401(k)s in the dirt.
According to the 2017 cash balance research report from Kravitz, Inc., the number of new cash balance plans increased in 2015, the most recent year for which complete IRS Form 5500 is available, by 17 percent, while 401(k)s only grew by 3 percent. The industry only expected an estimated growth rate of 12 percent to 15 percent in the sector.
In addition, total assets in cash balance plans expanded to $1.1 trillion, as they've logged double-digit growth every year since 2001. In fact, over the past 15 years, cash balance plans — driven by small business owners — have increased from 2.9 percent to 34 percent of all defined benefit plans. Between 2010 and 2015 alone, the nationwide growth rate of new plans hit 152 percent.
A whopping 92 percent of cash balance plans are in place at companies with fewer than 100 employees, as smaller and mid-sized companies look for ways to decrease risk and cost volatility. The plans not only offer higher contribution limits seen in traditional defined benefit plans, but also greater flexibility, more like that seen in a 401(k). They also provide tax advantages.
Changes made in the 2010 and 2014 cash balance regulations, including the “Actual Rate of Return” option, as well as new investment choices, have made the plans more flexible for employers, as well as removing some funding issues. Large plans are moving to “Actual Rate of Return” as well, with the number of large plans using it rising by nearly 20 percent.
Medical/dental groups and law firms still make up about 40 percent of the market, although cash balance plans are also becoming increasingly popular in other sectors, from technology to retail and manufacturing.
And while the switch to a cash balance plan isn't good news for all employees, the report cites one statistic that should please them: Employers typically double their contribution to employee retirement savings when they move to a cash balance plan.
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